As I have often said, the best kind of mispricing exists when a company is benignly neglected by a market which doesn't even know it exists. And it was gratifying to see the market start to recognize the substantial intrinsic value in Awilco Drilling's (OTCPK:AWLCF) shares on Friday. Literally, most investors were previously unaware (and many still are) that such a massively underpriced high quality dividend paying company (with a 16.4% yield) even existed.
I realized from substantial reader interest (18,288 views) and feedback (139 comments) that it was important to discuss and to contextualize Awilco Drilling's business not only through the lens of its largest shareholder, Anders Wilhelmsen Group, but also through the lens of my own background as the son of the renowned shipping executive Sumner A. Long, who was widely regarded for decades as the world's premier oil tanker broker.
I think it is important for readers to understand that while my specialty is in creating algorithms which find the world's best acquisition targets for private equity firms, that whenever possible, excellent quantitative finds spur us to fully identify the human, qualitative, managerial, operational, and contextual basis for a company's success. Literally, we need to understand the reasons why a company's numbers are so strong. What managerial approach creates such wonderful results? But we always start with businesses with great metrics and then ask "why" rather than engaging in the backward, but common, practice of finding "story stocks" which have a great intuitive story, but may not be executing when it comes to generating free cash flow.
Together with my own research, my network of contacts in the shipping world has given me special confidence in the management and the financial backers driving Awilco Drilling's splendid performance. And I am fully convinced that when investors understand the history of Awilco Drilling's 49% shareholder, the Anders Wilhelmsen Group, that they will come to appreciate that they are really the Berkshire Hathaway of Norway, with a storied track record of integrity, conservatism, and repeated success as investors and operators. The quality runs like blood through their different companies.
AWilhelmsen was founded in 1939 by Norwegian ship owner Anders Wilhelmsen, who diversified the company into tankers, dry cargo, and car carriers. Wilhelmsen and his sons Arne and Gjert, who joined him in the business, started painting on a more public canvass when they become the original investors in Royal Caribbean Cruise lines (RCL) in 1968 (they still retain a 15% ownership stake in RCL). Since then, they have diversified into the oil service industry, retail, and real estate. Lately, they have expanded their investment activities in public securities and private equity. Throughout their enterprises, they have always partnered with and insisted upon management which focuses like a laser on superb ship build quality, operations, safety, and maintenance. For example, my network of contacts in the shipping industry repeatedly pointed to the high quality of Royal Caribbean ships and their maintenance compared to those of Carnival Cruise (CCL) lines, which have been plagued by multiple incidents involving the loss of propulsion and power while at sea. The contrast with Royal Caribbean ships, which are well made and well maintained, is stark.
Let's take a closer look at AWilhelmsen's structure and various subsidiaries/investments. AWilhelmsen is a private, family owned investment firm. Arne and Gjert Wilhelmsen and their families own it, and Arne remains the chairman. Sigurd Thorvildsen serves as CEO. As we have seen, AWilhelmsen owns 15% of Royal Caribbean. AWilhelmsen also owns 50% of Expert AS, the second largest Nordic consumer electronics retailer. Their subsidiary Awilco Invest manages financial investments in public securities, while their 1000 employee real estate subsidiary Linstow focuses on urban real estate development in central Oslo. AWilhelmsen's shipping activies are managed through their subsidiary Awilco AS.
The AWilhelmsen's shipping subsidiary Awilco AS is fascinating, because it is involved in a variety of diverse businesses. It owns one suezmax tanker directly, and owns 33.7 % of the shares in the publicly listed Awilco LNG.
Here is where things get very interesting for investors who are looking for a blueprint and a track record which might give clues to Awilco Drilling's future. Awilco AS had a large ownership stake in the previously public Awilco Offshore. Awico Offshore operated (you guessed it), offshore drilling rigs. And in 2008, Awilco Offshore was acquired at an 18.7% premium by China Oilfield Services, a subsidiary of CNOOC, for $2.5 billion. But this 18.7% premium does not tell the whole story. The company was actually acquired at a 42% premium above where it traded before May 30, when Awilco Offshore disclosed that a third party had expressed an interest in acquiring it.
I would respectfully submit that shrewd investors have seen the Awilco Drilling movie before. It stands to reason than when Awilco AS is the 49% shareholder in another offshore drilling company, that they will again choose to sell the company to a larger acquirer at a massive premium to the current stock price. And while investors wait for such a buyout, we get paid a massive dividend. We have already seen AWilhelmsen's offshore drilling playbook. The political climate in the U.S. makes Norwegian drilling companies perfect targets for acquisitive foreign companies looking to diversify and to expand.
And here is another major advantage for investors to consider. An acquirer without drilling operations in the North Sea would view such an acquisition as diversification to an operational area with amazing daily rig rates and a huge structural shortage in the supply of rigs. And most importantly, since the North Sea has some of the most stringent regulatory requirements in the world, the raison d'être for a takeover would be to enjoy fantastic daily rates by acquiring a company which has already been licensed to operate in the North Sea. Literally, anyone who acquired Awilco Drilling wouldn't have to wait to build ships, gain contracts, and go through a brutal regulatory/licensing process. They would immediately enjoy massive cash flow. If Awilco Drilling had a diversified geographic footprint that mimicked the acquirer's own, it would negate the special concentration in the North Sea that makes it such a strong takeover target with no end in sight to rising rig rates. It is precisely Awilco Drilling's concentration in the North Sea which would be the very reason why the company is likely to be acquired.
And the macro picture has further improved this week, with an improving demand picture, as reported reported by the Wall Street Journal, which details extensive new tax incentives offered by the U.K. and an opportunity to avoid "years of political upheaval in Africa and the Middle East." Specifically, majors such as Total and Statoil plan massive investments in the North Sea in order to off-set declining production in other parts of the world plagued by political instability. For years, oil companies made an implicit bet that traded exploration risk for political risk by pursuing well-known fields in politically unstable countries. Today, the strategies of the majors are reversing, with companies placing a new focus on speculative exploration in politically stable regimes. U.K. tax incentives in the North Sea have accelerated this trend, and made the North Sea the world's prime destination for offshore drill rig demand. When you combine this massive demand for offshore drill rigs with a structural shortage of offshore drill rig supply, you get a lollapalooza effect of massively rising rig rates. And potential acquirers can see this wildly favorable macro picture, and I believe will be spurred to target offshore drill rig operators like Awilco Drilling. When you combine this motivation on the part of potential acquirers with Awilco AS's track record of success at selling its drilling investees at massive premiums, you have a very high probability of a successful buyout. And a massive 16.4% dividend yield while we wait. I will take that bet all day.